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Conference: Deposit Insurance

Policymakers in individual countries frequently ask the World Bank for its opinion about what adjustments in deposit-insurance design might be desirable. In responding to inquiries of this sort, Bank staff are hampered by the absence of a professional consensus on main issues. Theoretical literature identifies alternative strategies for balancing the benefits and costs of deposit insurance. However, distressingly little effort has been devoted to assessing the empirical impact of deposit insurance design.

Using statistical analysis drawing on new data sources, this research project empirically analyzes the impact of deposit insurance on banks, on the stability of the banking system, and on the way a country's financial system evolves. Our ultimate purpose is to turn the considerable amount of theoretical work on financial regulation in developed countries into a tested body of theory that can support reliable policy recommendations about how to tailor deposit insurance design to the particular environments of developing countries. Policy advice given by Bank economists on deposit insurance design must be sensitive to variations in institutional starting points and transition costs. There is no one-size-fits-all solution to individual country problems of financial reform and development. We expect the results to significantly enhance our understanding of issues in deposit insurance design and improve Bank's policy advice in this area.